Opinion
March 25, 1952.
Gerald Blumberg, New York City (B.L. Schwarz, New York City, of counsel), for plaintiff.
McKenzie, Hyde, Murphy Law, New York City (D.S. Murphy, New York City, of counsel), for defendant.
The plaintiff in this action asks this court for judgment directing the corporate defendant, and the individual defendants as its officers, to transfer on its books to the plaintiff a certificate of stock now standing in the name of Thomas A. Burton. The plaintiff claims that it acquired title to said certificate by foreclosure of a pledge thereof to the plaintiff made by said Thomas A. Burton as collateral security for various of his obligations to the plaintiff. The defense against this claim is based upon a restriction, obligatory upon the corporate defendant, against the sale of said shares under which they must first be offered to the other stockholders of the corporate defendant at the price which in good faith has been offered by any person, it being stipulated that said shares were not offered to the other stockholders at any price.
The defendant Burton-Fifth Avenue Corporation is a Burton family corporation organized pursuant to a certain contract dated November 30, 1926 and known and referred to as the "Real Estate Contract" (Deft's Ex. A) entered into by the several members of the Burton family who at that time were the owners, as tenants in common, of the real estate and buildings and improvements thereon, located on Fifth Avenue in the Borough of Manhattan, City of New York, being Nos. 424 to 434, inclusive, on Fifth Avenue, Nos. 1 to 11, inclusive, on West Thirty-eighth Street, and Nos. 2 to 14, inclusive, on West Thirty-ninth Street, occupied by Lord Taylor under a long-term lease, and known as "the Lord Taylor property."
The Real Estate Contract contained the restriction involved in the present action. At the first meeting of the board of directors, resolutions were adopted which recognized that the corporation had been organized pursuant to said contract and which authorized the issuance of securities in compliance with and subject to the terms and conditions of the Real Estate Contract. The certificate of stock issued to Thomas A. Burton, plaintiff's pledgor, contains the language of the contract requiring any holder of the certificate, before selling it to others, to offer it to the other parties to the agreement and their legal representatives and assigns at the price offered by the prospective purchaser. In the court's opinion the restrictive provisions of the agreement, set forth verbatim in the certificate issued to plaintiff's pledgor, may be availed of by the defendant corporation since they were part of the contract between the corporation and plaintiff's pledgor, embodied in the certificate, not to mention that the restrictive provisions of the certificate were contained in the Real Estate Contract pursuant to which the corporation had been organized and which the board of directors ratified and adopted. Under these circumstances, the fact that neither the certificate of incorporation nor the by-laws of the defendant corporation contain any reference to the restrictive provisions is immaterial. Cases such as Matter of Argus Co., 138 N.Y. 557, 34 N.E. 388, and Matter of Haecker, 212 App.Div. 167, 207 N.Y.S. 561, cited by plaintiff, are not in point since in those cases the corporations were not parties in any way to the private agreements between stockholders regarding the conditions under which such agreements permitted transfers of stock.
The restrictive language of the Real Estate Contract was not broad enough to forbid a pledge of stock by a stockholder without first offering to sell or pledge the stock to the other parties to the Real Estate Contract. Accordingly, Thomas A. Burton's pledge of his certificate to the plaintiff did not constitute a violation of the restrictive provisions of the certificate. It does not follow, however, that plaintiff had the right to cause a foreclosure sale of the certificate to be made (either to others or to itself), pursuant to the power of sale which accompanied the pledge, without offering the certificate to the other parties to the Real Estate Contract as required by the restrictive provisions. In Good Fellows Associates, Inc., v. Silverman, 283 Mass. 173, 186 N.E. 48, the holding was merely that restrictive provisions requiring any stockholder desiring to sell his stock to first offer it to the corporation was not violated by a pledge of stock. The court recognized, however, that no sale of the stock by the pledgee could be made without compliance with the requirement that it first be offered to the corporation. Thus the court said, 283 Mass. at page 181, 186 N.E. at page 50:
"It is plain the Citizen's Finance Corporation did not hold title to the stock evidenced by the thirty-four certificates of stock as owner, but held such in pledge, with power to sell upon default subject to the restriction printed on the back of the certificates for the thirty-four shares of stock." (Italics supplied.)
In the cited case, the pledgee, The Citizens Finance Corporation did offer the stock to the corporation on January 20, 1926, but the corporation refused to purchase [ 283 Mass. at page 177, 186 N.E. at page 48]. It was only [ 283 Mass. at page 181, 186 N.E. at page 50] " upon the refusal of the plaintiff to purchase the stock" that The Citizens Finance Corporation "became entitled under the restriction to have the corporation issue new certificates of stock." A restriction against a sale of stock without first offering it to the other parties to the contract would be valueless if a stockholder had the right not merely to pledge the stock to others, but also to confer upon the pledgee the right to sell the stock on default without giving the other parties to the contract an opportunity to purchase at the same price. The pledgee, taking the stock with knowledge of the restrictive provisions, was obligated to give the other parties to the Real Estate Contract an opportunity to purchase before it purchased the stock itself.
In Barrows v. National Rubber Co., 12 R.I. 173, cited by plaintiff, the sale was not the result of a voluntary act of the stockholder. The stockholder had not conferred a power of sale upon a pledgee as in the case at bar. The sale was an involuntary sale under an execution. Similarly, in E.I. Du Pont De Nemours Co. v. Pathe Film Corp., D.C., 25 F.Supp. 850, also cited by plaintiff, the sale was the result of a distribution in dissolution, by operation of law.
For the reasons indicated, the plaintiff's motion for judgment is denied and the defendants' motion for judgment dismissing the complaint granted. The objection to the admission of the Real Estate Contract into evidence is overruled with an exception to plaintiff, as is the objection to the admission into evidence of the minutes of the meeting of the board of directors of defendant corporation on January 20, 1927.
The foregoing represents the decision of the court.